JUNE 2, 1982
New Directions for the Canadian Economy
AN ADDRESS BY The Right Honourable Peter Lougheed, Q.C. PREMIER, PROVINCE OF ALBERTA
CO-CHAIRMEN Henry J. Stalder,
PRESIDENT, THE EMPIRE CLUB OF CANADA
Peter C. Godsoe,
PRESIDENT, THE CANADIAN CLUB OF TORONTO
Distinguished members and guests, ladies and gentlemen: Good things come in threes. And this June second, 1982, must be a lucky day for us since our guest of honour is with us today for the third time, having addressed us in March 1966 and in May 1973.
Mr. Lougheed, you addressed a large crowd once at the Maple Leaf Gardens in the Diefenbaker years but today, this foremost audience came out just for you.
The Honourable Peter Lougheed, Q.c., is a lawyer by trade and a politician by vocation. In 1965, he was appointed provincial leader of the Progressive Conservative Party of Alberta, after having created the Conservative movement out of nothing at a time when others just inherited their party organization. His style is team play; he played professional football with the Edmonton Eskimos. His approach is leadership; he climbed Mount Lougheed in the figurative sense as well as literally, on the occasion of the seventy-fifth anniversary of the Province of Alberta. Since the 1971 election campaign, we have simply been watching what "serving" has meant and means to this man. His grandfather, Senator Sir James A. Lougheed, Alberta's first federal cabinet minister, would be proud of him today.
Peter Lougheed is the advocate of free trade and the promoter of a better future. His commitment is toward one province but he has said time and again that one should work toward provincial governments which consider themselves Canadian first so as to create national unity and economic autonomy, and to give all Canadians one common goal. In a nutshell, we should all work for our future, or as David Crombie once remarked, "Tomorrow is decided by us walking the walk and not talking the talk."
Through his life's steady drive, Peter Lougheed has proved his determination. He was educated at Calgary public and secondary schools and at the University of Alberta, where he obtained both a Bachelor of Arts and a Bachelor of Laws degree. Later on, he graduated from Harvard University with an MBA.
Between 1956 and 1962, he worked for Mannix Company Ltd., where he was General Counsel, Vice-President, and Director. He left this company to enter private legal practice and finally, left his partners out of devotion to his party. It was a risky move at that time and there must have been many trying and taxing moments while he reached the decision to devote himself to the business of state. In trespassing his own barriers, he dared to question their demarcation, and by so doing he has gained a new dimension of character. Ladies and gentlemen, please welcome our distinguished guest speaker, the Honourable Peter Lougheed, Q.c., Premier of Alberta.
Mr. Chairman, ladies and gentlemen: My main theme today is the need for a reassessment of current Canadian monetary policy and its relationship to interest rates. In the next few months, Canada faces some very difficult economic decisions. There are three main options and a number of related policy issues to be considered. The first option is to continue with the current policy of real interest rates averaging five to seven percentage points above the consumer price index, the justification being the desire to contain inflation and sustain the value of the Canadian dollar in relationship to the United States dollar.
The second option is to recognize that the value of the Canadian dollar is derived as much or more by the attitude of investors to purchase Canadian dollars or retain their existing Canadian interests than it is to any margin of interest rate differential between the United States and Canada. Thus, the second option is to suspend the Foreign Investment Review Agency and alter dramatically the Canadianization features of the National Energy Program. This should encourage foreign investors to change their current negative perception and arrest the haemorrhage of Canadian investment pouring out of the country, not just by foreign investors but by Canadian entrepreneurs as well. This second option should allow for a reduction of Canadian interest rates to the extent, at the very least, that monetary policy is being used to artificially prop up the Canadian dollar.
If the federal government is not prepared to pursue the second option of encouraging investment in Canada with a dramatic new approach, the third option is for Canadians to accept the implications and consequences of a lower Canadian dollar upon reduction of interest rates. I wish to make the case today for the second option, but if not accepted, then for the third option of a lower dollar, rather than continue the current, abnormally high interest-rate position with the risk of permanent and lasting damage to many job-creating enterprises all across Canada. But first, by way of background, I believe it would be useful to review some major economic issues as they exist in Canada today, with particular reference to the implications of the slower pace of Western Canadian development as well as to the energy scene as it appears from today's perspective.
The degree of real concern over the extent of foreign ownership of our economy has to evolve beyond the simplification of polling Canadians as to whether or not they prefer, for example, to see a larger portion of the Canadian oil and gas industry owned by Canadians. Obviously, the vast percentage of Canadians are going to answer "yes" to such a simple question. But recent polls indicate quite a different answer if the question is phrased on the basis of whether or not limiting foreign ownership would lead to fewer jobs for Canadians.
Further, it needs to be explained that the transactions during 1981 by certain Canadian-owned petroleum companies in acquiring the shares of successful foreign petroleum companies in Canada merely resulted in a shift from foreign equity to foreign debt. This shift would have negative implications if the pattern of the foreign company acquired had been to reinvest the earnings and create jobs in Canada rather than to pay dividends to the parent.
Those who argued in the last federal election for such constraints in foreign investment in Canada made their arguments primarily on the basis that somehow these large foreign ownership interests threaten the sovereignty and hence, future best interests of Canadians. As I responded in this city two years ago to the Canadian Press dinner, the record of foreign investment in Canada had been very positive for Canadians, with only a few isolated cases to the contrary. I also pointed out that as the provinces own the oil and gas resources, sovereignty was a federal smoke screen for other oil and gas issues.
As you are aware, the United States government has now taken the unprecedented step of appealing the actions of Canada's Foreign Investment Review Agency to a review panel of the General Agreement on Tariffs and Trade. This action has caught the attention of investors all over the world, who now view Canada as a questionable country for investment. In addition, the clearly discriminatory aspects of the National Energy Program have resulted in an even more negative reaction. For example, a recent newsletter by Salomon Brothers of New York, a leading Wall Street investment firm, had this to say, "We have suspended research coverage of all Canadian oil firms. While we will continue to survey developments 'north of the border' the Canadian federal government's energy policies make foreign investment in that nation's energy sector unwelcome and, in our opinion, unwise."
We in Alberta have always supported and encouraged a larger Canadian ownership interest in oil and gas. The National Energy Program, however, went about it in entirely the wrong way! During the latter half of the seventies, the adjustment of tax policy encouraged Canadian investment in our own oil and gas industry through drilling funds and in other ways. True, it was not dramatic but it was a significant trend. The National Energy Program discriminates against existing long-term foreign investment in Canada's oil and gas industry. This has had the following negative consequences: firstly, it has almost stopped new foreign investment in energy in Canada; secondly, it artificially depressed the value of certain foreign oil and gas interests in Canada, which encouraged some questionable acquisitions; thirdly, to the consternation, I am sure, of the National Energy Program planners, it has caused a significant outflow of Canadian entrepreneurial investment from Canada; and finally, it has damaged most that almost fully Canadianowned segment of the oil and gas industry--the drilling and servicing segment. Perhaps on this issue, many of you may not be aware that the current federal government's anti-foreignownership policy is opposed by almost every Canadian premier and is not, I believe, a policy accepted by most of the residents of the Western and Atlantic regions, and even Quebec.
The situation of investment confidence in Canada was fur- , ther shaken by the federal budget of November 12, 1981. What had previously been hailed as incentives for investors were now categorized as loopholes. Many of your previous speakers have reviewed the negative investment features of last fall's budget.
As you all know, the current position of the Canadian authorities is that we must have high interest rates to reduce inflation and that our rates must track the United States rates to ensure that the value of the Canadian dollar is sustained. As high interest rates prevail for an extended period of time, a 'number of serious negative impacts result. Firstly, established businesses find their cash flow is dramatically reduced, so they lay off employees, postpone modernization, and try to struggle to survive. Secondly, consumers, particularly those with shortterm mortgages or soon-to-be-renegotiated mortgages, defer purchases of all but necessities, which seriously affects jobs in durable goods manufacturing. Thirdly, potential growth areas like the energy sector retrench, limiting job prospects for our young and educated. Fourthly, small businessmen, farmers, and fishermen are perhaps the most seriously harmed by high interest rates and most of them did not vote for the current federal government which pursues these policies, causing resentment, alienation, and disunity, particularly in the Western and Atlantic regions of Canada. The question for Canadians is--how long can this high interest rate policy be sustained without serious long-term damage to our economy?
It is argued that the current policy of high interest rates will curtail inflation because it is based on a tight money supply theory which, it is argued, avoids too many dollars chasing too few goods and services. Others argue, on the contrary, that this is true up to a point but after a certain point, the reverse occurs. High interest rates force businesses to try to squeeze higher prices for their products. High interest rates squeeze disposable income and force demands for higher wages.
It is interesting to note that United States inflation rates are declining much faster than ours, yet interest rates are high and
money supply is tight in both countries. Why? There must be factors in the United States causing a decline in inflation other than high interest rates or tight money. One factor is clear--despite Alberta's urging, Canadians deferred accepting high energy costs in the seventies, when we could have absorbed them much more easily. This was the course followed by almost every other developed country.
Why are the current wage demands of Canadians higher than those in the United States? Frankly, I'm not sure. One possible explanation is that to a large extent, Canada--perhaps because of the pull of the Western Canadian energy boom--skipped the full realities of the last recession, which were felt more severely in the United States during 1977-1978. Also in Canada, the public sector unions play a major role in fuelling wage demand expectations. Clearly, this is a matter of growing concern to most Canadians. Are Canadian private-sector trade union leaders really prepared to sacrifice permanent job loss by some of their membership?
The public sector's share of the Gross National Product in Canada is becoming much too large and we accept the need to constrain government expenditures on an ongoing basis at all levels. However, in Alberta, for example, although our budget grew rapidly in the 1970s, the government operating budget as a percentage of the Gross Provincial Product did not increase because of the very large growth of private sector investment. It is unrealistic for business to expect government expenditure at all levels to modify quickly and hence, reduced government expenditure should not be relied upon as a solution to our immediate, serious economic situation in Canada. However, in my view, public sector wage and salary guidelines (not controls) to ensure that public sector settlements do not lead or encourage the private sector would be a useful first step in a private-sector-led recovery.
Time precludes a full assessment of the energy scene in Canada but it is desirable to sketch a few highlights. OPEC has weathered the storm with its production cuts and will emerge from the recession in control of pricing. This position has been enhanced by the deferral of oil sands and oil shale projects in North America.
The key question is the degree to which reduced oil demand is due to conservation efforts or to a slowdown of economic activity. The experts are divided on this question. It is our view that the easiest conservation methods have already been implemented and future demand will be less influenced by conservation and more by aggregate economic activity. We foresee world oil and other energy prices firming up relatively soon. It is now apparent that the objectives of the National Energy Program will not be met. Without new oil sands production or enhanced recovery together with reduced drilling activity, the target of oil self-sufficiency for Canada has been set back and Canada will become increasingly dependent on foreign oil supplies. This will also have negative implications for our balance of payments situation. The federal Canadianization approach is proving to have many more negative than positive consequences.
We stated, when signing the energy agreement of September 1, 1981, that because of the serious and unnecessary damage caused by the National Energy Program, it would take at least eighteen months before there was a significant recovery for our conventional oil and gas industry in Western Canada. Unfortunately, this is the very time when a dynamic Western energy sector could have pulled much of the Canadian economy, and particularly Ontario manufacturing, through the current recession. The energy agreement of September 1, 1981, does, however, provide a framework for recovery. It encourages exploration for oil with world prices, it encourages exploration for natural gas by virtue of elimination of a natural gas export tax, and it caps federal taxation of the industry and creates a stable environment between governments.
Unfortunately, a number of events last fall further weakened the short-term cash flow of the petroleum industry. Continued high interest rates, shut-in oil production, and the federal budget all combined to further discourage the exploration industry in Western Canada.
We believe the corner has now been turned and the industry in Western Canada is beginning to start its delayed recovery, provided that interest rates decline soon. Our Alberta oil and gas activity plan of April 13, 1982, was a $5.4 billion program over five years stimulating and improving the industry's cash flow primarily through direct royalty reduction. It has been well received by the petroleum industry. As you are aware, the federal government made certain adjustments to their taxation and pricing of the petroleum industry two days ago. Although these are useful and supportive steps on the road to recovery for this key industry, we expect the federal government to continue to assess the adequacy of their adjustments to the current circumstances. The petroleum industry has been further encouraged by the recent report of the National Energy Board on the export of natural gas, which has been endorsed by the federal government. Alberta is working closely with the natural gas industry on a marketing strategy for natural gas exports into the United States. And we are assessing--in the wake of the Alsands decision--different approaches to oil sands and heavy oil activity in Western Canada.
Despite these difficulties, the Alberta economy is forecasted to be the strongest provincial economy in Canada in 1982. However, the National Energy Program precluded the degree of economic activity which, as I have mentioned, could have assisted in a less serious recession in other regions of Canada this year. We are confident that the Alberta economy will rebuild as the worldwide recession phases out and interest rates decline. Our province is geared to private sector investment from all over the world. Our potential in energy and food production and processing is unparalleled. Our diversification into petrochemicals, finance, and high technology provides a secondary base for profit potential.
It is reality in Canada today that our prosperity and unity depends upon co-operation between the federal government and the provinces. Recent events have shown the interdependence between the regions. The provinces must be a part of national economic policy formulation or such policies will not work and will foster serious regional disunity. Federal elected representatives must regain the decision-making process which they defaulted to the Ottawa bureaucracy.
Before concluding on the monetary policy issue, I would like to summarize a number of economic directions which should form part of our future national economic strategy:
1. Equity markets should be stimulated by a new federal budget encouraging the risk investor.
2. Public sector wage and salary guidelines (not controls) should be agreed to by all eleven first ministers.
3. Overall price and wage controls should be strenuously resisted as an artificial solution to deep-seated Canadian economic problems.
4. Productivity improvement should be encouraged by tax incentives and management-labour consensus.
5. Government expenditure constraints should be applied to operating programs and manpower requirements--not to tax incentives or capital improvement programs like transportation facilities.
6. The consumer price index should be reassessed to determine its credibility and its inherent inflation-creating aspect as a target for wage demands.
7. Elected representatives in Ottawa should force a change in attitude by the bureaucrats toward the entrepreneur, and a new spirit of co-operation and mutual trust should be developed between business and the federal government.
Within this policy framework, let me return to my primary submission of the urgent need to reassess our current Canadian monetary policy and its relationship to interest rates. One option is to continue with a current policy of real interest rates much higher than historical levels, real interest rates, in short, being the difference between the interest rates charged and the current level of inflation. As noted, this policy is justified as being a positive factor in reducing inflation and also necessary to sustain the value of the Canadian dollar at eighty cents or more in relationship to the United States dollar. The growing concern with this option is whether the policy is, in fact, effective in reducing the rate of inflation, but even much more serious--has it been extended for too long? A continuation of this high interest rate policy could do permanent and lasting damage to the peculiar Canadian economic mix of small businessmen and primary producers like farmers and fishermen.
I firmly believe that this permanent and lasting damage has already begun and will accelerate. We have a different enterprise mix in Canada than in the United States. Interest costs--as a percentage of cash flow--have been estimated as reaching a new high of 38 per cent at the end of 1981. This high interest rate policy should be terminated very soon.
It is also perceived as basically unfair in at least the Western region of Canada. It is perceived as a price we Westerners are forced to pay because of the vote shift--principally in Ontario--in February 1980 to endorse the Liberal Party's anti-privatesector investment policies. Westerners did not support these policies and the cost of the policies now, through high interest rates, is causing serious alienation in the Western region of Canada.
The second option involves a basic change in policy in Ottawa. Investors within Canada should be encouraged to retain their investment in Canada. In 1981, the outflow of investment from Canada was a record $10.2 billion compared to $1.7 billion in 1979. Investors in other parts of the world should be encouraged to invest in Canada by suspending the Foreign Investment Review Agency and by altering the discriminatory treatment provisions of the National Energy Program. If this second option is pursued aggressively--with actions, not just words--and supported soon by a new federal budget encouraging the risk investor, then interest rates could be significantly reduced without any marked devaluation of the Canadian dollar. This is my personal, preferred course of action. I have to admit, though, that the prospects of such a change in federal policy are not promising, unless the federal government caucus reasserts its true parliamentary role and takes over control from the Ottawa bureaucracy.
The third option is a tough choice but is, in my view, much more preferable than option one--which is a continuation of excessive high interest rates and the risk of permanent and lasting damage to the economy and to Canadian unity. The third option is to accept the devaluation of the Canadian dollar as we lower interest rates. Should we not see what the true value of the Canadian dollar is? Should those citizens who voted for an anti-private-sector investment policy not be entitled to judge the true merit of such a policy option?
What are the consequences of devaluation? Well, first, let's not fool ourselves that we can follow this course in Canada and use exchange controls to minimize the negatives. Exchange controls would exacerbate the devaluation in any event and, in my view, would not work in the North American financial milieu. The concerns raised by those in opposition since the ten premiers proposed a "made in Canada interest rate policy" at the February First Ministers' Conference on the Economy, have been primarily that devaluation would create an accelerated degree of inflation. I believe this concern has been greatly exaggerated. This is supported by the minimal inflationary impact of previous devaluations, when the dollar dropped first from parity with the United States dollar and then subsequently dropped below ninety cents in relationship to the United States dollar. Granted, the degree of inflation arising from devaluation would be subject, in any event, to the extent of Canada's effectiveness in creating wage stability.
Devaluation would, on the other hand, result in Canadian consumers being required to change their buying habits and forsaking imported food and other products. It could well result in a real "Buy Canadian" program by manufacturers to force import replacement. It would encourage Canadians not to travel as much outside Canada but to spend their vacation dollars in their own country.
Another reason inflation concern is exaggerated on devaluation is because there is considerable unused capacity in the Canadian economy to be absorbed.
Yes, it would cost us more to service our debt but keep in mind that the Canadian dollar has actually appreciated in relationship to the currency of a number of countries other than the United States.
The degree of devaluation could also be minimized by an acceleration of permits for sales of natural gas to the United States.
Admittedly, it is a difficult decision. But if option two is not endorsed by the Ottawa government, then option three and lower interest rates at least in the short term, is, in my view, the better course of action for Canada at this time. But option two is what is needed for Canada now--a new direction for confidence and encouragement for the risk investor, wherever he comes from in the world. Canadian entrepreneurs are prepared and capable of competing with their counterparts from other countries. Let's end this nonsense of putting an investment wall around Canada.
Yes, it is a difficult time, difficult for policy makers and for 'all citizens. But my conviction is that Canada has not just a reservoir of resources but also of talented citizens, dynamic entrepreneurs, and of good will toward their fellow Canadians in other parts of Canada. We must build upon these strengths. Those in positions of responsibility in business, and unions, and communication, and in government must increase their efforts at communication and understanding. It is a time for candour--a time to try to explain the complexities and possible negatives of policies like so-called Canadianization. It is a time for confidence in the longer-term future of Canada. Let's not talk ourselves into a depression of doom and gloom. It's a time to rebuild, and more than anything, to rebuild the confidence and trust of investors--of the private sector--both inside and outside Canada, in the future of this great nation.
The appreciation of the audience was expressed by Peter Godsoe, President of The Canadian Club of Toronto.